Stabilization with Fiscal Policy
Working Paper 29226
DOI 10.3386/w29226
Issue Date
Revision Date
I reconsider the long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. I use an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, I show that it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy).
Published Versions
Narayana R. Kocherlakota, 2022. "Stabilization with Fiscal Policy," Journal of Monetary Economics, . citation courtesy of